Why Entrepreneurs Are moving to Puerto Rico

In order to spur job growth and economic activity in general, the Commonwealth of Puerto Rico introduced these enormous tax incentives for incoming residents and service businesses.

Specifically, for Puerto Rican residents and businesses that qualify—mostly expatriates from the US mainland or their enterprises—the recently enacted Act 22 and Act 20 provide for a zero tax rate on capital gains and certain interest and dividends earned by individuals.

And, if you a run a business that exports services like I’m doing here, they also provide for low single-digit tax rates on your profits. No double tax taxation, no income tax on profits, just a top 4% withholding on distributions to owners (and no corporate tax on profits sent to your partners outside of Puerto Rico, either).

According to Bloomberg, “The marginal tax rate for affluent New Yorkers can exceed 50 percent on ordinary income.”

By relocating to Puerto Rico, enormous tax savings can be achieved.

For certain investors, that could mean eliminating taxation completely. For the right businesses, it could mean tax rates of just 4% on earnings.

Anyone who relocates to Puerto Rico can apply for the tax shelter of Acts 22 and 20—including mainland US citizens, who cannot find similar benefits anywhere else in the world without significant complication and expense.

Experts say that the unfavorable tax policies plaguing US citizens are responsible for the record number of Americans saying goodbye permanently to Uncle Sam by renouncing their citizenship and heading to places like Singapore, Panama, Thailand, Dominican Republic, and others.

As a matter of fact Forbes reported that the number of US citizens and permanent residents who gave up their citizenship soared 221% last year alone.

That’s what Facebook cofounder Eduardo Savarin did when he headed for Singapore.

But the penalty for giving up your citizenship is high if you’re wealthy, because to the large US exit tax. The US Government is aware of this trend and are always looking for new tax laws to accommodate.

Puerto Rico wants in on it to boost their own economies, like countries mentioned have. Because of those dual forces, there is now a much easier way to seek less-taxed shores, one of which is rooted in decades of US law and that is non other than the common wealth of Puerto Rico.

By becoming a resident of Puerto Rico, you can escape paying high US taxes legally, still retain your American citizenship, and avoid paying the hefty exit tax, since Puerto Rico is an unincorporated territory (commonwealth) of the US, it’s allowed to have a special tax arrangement.

Legal residents of Puerto Rico who earn their income in Puerto Rico do not pay US federal income taxes.

All Puerto Ricans are already US citizens, and since it is a commonwealth of the US, Americans are generally free to stay on the island without restriction and do not even need a passport to travel there. It’s like visiting another state for most purposes, though one that predominately speaks Spanish and 34% of the natives speak English as well.

Over the years, Puerto Rico caught on to the enormous benefits that tax incentives brought to its neighbors in the Caribbean and Central America, and provided incentives to draw big manufacturers like Microsoft, Pfizer, Bard, and Praxair to the island and today, they all have facilities on the island.

Furthermore, Puerto Rico slashed its taxes on capital gains, dividends, and interest to ZERO for new residents who apply.

This means that mainland Americans who move to Puerto Rico can eliminate taxation on investments they make on the island or in the markets. This is a huge benefit to stock traders, venture capitalists, M&A practitioners, or anyone who gets bitten by capital gains tax at the end of the year. This is what “Act 22” accomplishes.

Additionally, PR launched a set of incentives to draw service businesses to the island. Everything from asset managers to marketers and public relations professionals. Computer programmers. Graphic designers. Or writers, researchers, digital services, etc.,. Under this law, which is called Act 20, any service business that can be operated in Puerto Rico for clients outside of Puerto Rico can apply for special tax treatment, including a host of benefits of which the most important is a tax rate of 4% or lower.

If you’re a person who makes most of your money from capital gains, a service provider, have an online business or you provide services from Puerto Rico to your non-Puerto Rican clients, or a business owner with operations outside of Puerto Rico… then you could benefit substantially from very significant income tax savings with a move to “la isla del encanto” the Island of Enchantment.

The tech/startup culture on the island

Today, Puerto Rico is home to a growing number of co-working and technology incubators and accelerators. Sofia Stolberg founded the first co-working space in Puerto Rico called Pilot 151 five years ago in the historic Old San Juan neighborhood. Since then, they have opened a second location in Santurce. Sofia isn’t the only founder helping to foster the tech and startups ecosystem in Puerto Rico. Sebastian Vidal is the executive director at Parallel18, one of the first startup accelerators on the island. Startups that are selected by P18 are given a $40 thousand grant they can use to seed their business. By creating a digital economy on the island of Puerto Rico, P18 is giving a new generation of global-minded Puerto Rican entrepreneurs the best tools to confront the current economic crisis by putting likeminded talent together to create, innovate and impact change.

Island Living

Another significant reason to move to Puerto Rico besides the incredible tax breaks is the lifestyle. PR has beautiful beaches, great climate, tropical rainforests, fantastic music and dancing, incredible food and even a magical bay where the water glows in the dark. It is no wonder they call Puerto Rico the island of enchantment.

Whether you are a long-time digital nomad looking for a new home or looking to try remote working for the first time, Puerto Rico may be what you’ve been looking for and dreaming of.

But, be mindful, there are some hurdles you need to be aware of. This is not a decision to be made on the fly; it requires further research on your end, preparation and planning, but is very doable and for most that have made the move, it has been a great decision